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Trading or Gambling – Here is the Answer
Can the New York Times be any more condescending in its coverage of the latest “outrage” of the week -- the phony scandals in the two sports based fantasy websites in US. Suddenly just like Claude Raines in Casablanca they are “Shocked! Shocked! that gambling is going on here.”
Except that it is not.
In this video the “paper of record” can barely hold back its distaste for the whole sordid enterprise of fantasy sports even as it interviews one of its most successful practitioners -- a college student from DePauw University who has made hundreds of thousands of dollars betting on sports events. He patiently explains to the reporter how we diversifies his bets, optimizes his player picks and constantly re-evaluates his line ups. In other words he is doing everything that a successful prop trader would do. Yet the Times can’t help but smirk at the volatility of his returns as “evidence” of gambling.
This is wrong on so many levels because it is the same ill informed insult casually tossed at anyone who tries to speculate in the financial markets. “Aren’t you JUST gambling?” is question I get all the time typically usually wrapped in a smarmy smile and a look of pity.
No moron. I am not.
Gambling is a fixed odds system in which the participant is guaranteed to lose against the house. So in blackjack, craps, baccarat, roulette the odds are always at least 50.5% to 49.5% against you. That means that no matter how much money you have if you play long enough you will lose it ALL. There is absolutely no doubt about that and the critical point to understand is that all casino games are FIXED odds structures which is why you should never play them.
Now the moment you change those rules, the moment for example, you start counting cards at blackjack, you no longer have a fixed odds system and you actually have a dynamic market in which skill can win. That’s why casinos hate card counters and ban them the moment they spot them. Casinos love the create the “illusion” of a market but their game is very clearly and very deeply rigged.
Everything else in life is just a market with open ended -- and more importantly -- dynamically changing odds of success.
Is walking against a red light in front of my house on Broadway gambling? For that matter is walking against a green light gambling too? Well at 4 AM in the morning when the road is barren the answer is pretty much no. But at 4 PM in the daytime when some stupid Jersey tourist doesn’t know that there is no right on red in New York and decides to swerve a Chevy Tahoe in your face -- well the answer could yes.
My point is that it its incredibly stupid to refer all betting activities as gambling without understanding the underlying structure of the game. Otherwise everything we do in life, from what we put in our mouth, how we choose to make money, to what person we decide to marry is “gambling”. Its is not. It is the assumption of risk, but it is not a guarantee that you will lose like in Vegas.
So the proper question to ask when it comes to trading isn’t -- are you gambling or not? -- but rather are you able to successfully manage the risk of the market or not. To put it bluntly if you suck and are losing all your money you are probably gambling in the worst sense of the word -- i.e. guessing wildly without any understanding of the probabilities involved. If on the other hand you seeing steady and consistent success -- you may be actually skillful.
The key to understanding if you are lucky or good rests on the number of tries. This actually makes eminent sense when you bring it back to sports. Anyone can sink a 10 foot putt, but do it 1000 times and I guarantee you that Jordan Spieth and Jason Day will beat you every time. The general rule in life that separates luck and skill is the ability to replicate success over a large
Although statisticians will tell you that 100-200 samples is usually good enough, when it comes to trading I think you need at least 1000 trades to have some degree of confidence that what you are doing is more than luck. My latest day trading system for example has done 769 trades made 8.28% with a drawdown of 3%. All pretty good stats, but hardly enough to make me want to put it on auto pilot and retire to Florida. In fact I don’t think I will ever do that because as I said earlier markets are open ended probability systems that require constant adjustment which means I’ll probably be tweaking my strategies til the day I die.
So am I gambling when I am trading?
I am WORKING on my ideas every single day -- just like everybody else